Sloan Transmissions, Inc., has the following estimates for its new gear assembly project: price = $2,800 per unit; variable costs = $560 per unit; fixed costs = $3.0 million; quantity = 86,000 units. Suppose the company believes all of its estimates are accurate only to within ±10 percent. What values should the company use for the four variables given here when it performs its best-case scenario analysis? What about the worst-case scenario?

- Values the company should use for the four variables when it performs its best-case scenario analysis:

+ Price = 3,080 per unit;

+ Variable costs = $504 per unit;

+ Fixed cost = $2.7 million;

+ Quantity = 94,600 units.

- Values the company should use for the four variables when it performs its worst-case scenario analysis:

+ Price = 2,520 per unit;

+ Variable costs = $616 per unit;

+ Fixed cost = $3.3 million;

+ Quantity = 77,400 units.

Explanation:

- Under the best-case scenario analysis, price and quantity should be given the highest (thus the best) estimates while variable costs and fixed costs should be given the lowest (thus the best) estimates. So, we have:

+ Price = 2,800 x 1.1 = 3,080 per unit;

+ Variable costs = 560 x 0.9 = $504 per unit;

+ Fixed cost = 3 million x 0.9 = $2.7 million;

+ Quantity = 86,000 x 1.1 = 94,600 units.

- Under the worst-case scenario analysis, price and quantity should be given the lowest (thus the worse) estimates while variable costs and fixed costs should be given the highest (thus the worst) estimates. So, we have:

+ Price = 2,800 x 0.9 = 2,520 per unit;

+ Variable costs = 560 x 1.1 = $616 per unit;

+ Fixed cost = 3 million x 1.1 = $3.3 million;

+ Quantity = 86,000 x 0.9 = 77,400 units.